All Forum Posts by: Jonathan Twombly

 Seems like a better source than that Schroeders list!  Thanks.

@Ronald Hayden   We do something similar to what @Dan Schwartz suggests.   We have two LLCs - one is a holding company and the other is a management company.  The holding company holds working capital we need to tie down deals.  We get that money back when funding a deal from investor money.  That company also holds our carried interests on deals.  

Management fees go to the management company and pay for expenses.  Profits flow through.  

Working capital cycles in and out of the holding company.  Profits to the carried interest flow through and are distributed.   

If we invest money personally, it's done directly into the property LLC and not through either the holding company or the management company. That cash is treated like any other passive investor's money. It's kept separate from our management and carried interest/ promote, legally and from an accounting standpoint.

 Chris,  think there is a relationship but the causality is backward.  When demand for US assets rises, the dollar rises, because people need to convert their local currency to dollars so they can buy dollar-based assets.  When demand for US assets cools off, the demand for dollars does too.  So the drop in the dollar may be a signal that demand for US assets is slackening, not the other way round.  

Though this is only one example, I have some experience with this. One wealthy Japanese family has invested in two of my deals.  When the yen was high and the dollar was low, they were very interested in US assets, because they saw value there.  They believed the yen would fall against the dollar and in yen terms they would make money even if the US assets did not.  They stood to make a ton of money if the US assets made money AND the dollar rise, which is exactly what happened.  

However, when the dollar rose, they were no longer interested in my deals because they believed chances were likely that the dollar would fall again and wipe out any gains the assets made. 

The dollar being high means that demand is high and prices are high, and currency risk is high.  The dollar being low means that US assets are relatively cheap, bargains are available, and currency risk is relatively low.  The dollar dropping now may be a signal that foreign investors feel the market is too high and they are pulling back, waiting for a better opportunity.  Though I'd say it's too soon to tell if the tide of foreign money is finally going out.  

 There is almost always a problem with top ten lists like this.  First, they are usually marketing pieces, designed to get clicks.  Second, they are aimed at casual investors who don't want or need to think about how to actually make money in real estate.  In this case, this chart was prepared by an asset management firm looking for passive investors in a fund.  So it designed a really casual ranking - because people love rankings - and a flashy graphic.  

When you look at the "report," which is hardly academic at all, it ranks six factors for "best".  At least three of those factors are basically measures of "bigness" - population over 15; metro GDP; and retail sales.  

None of the factors considered are ones that investors look at - population growth (not just population); job growth; or supply and demand.  Cap rates are not mentioned.  

One factor on the list is income - not income growth or income relative to rents, just income.  So what?  Affordability is critical if you want to raise rents, not absolute income.  You want to see that rents are low relative to median income, so you know that you can raise them.  In major cities, despite high incomes, huge increases in rents relative to incomes have left landlords in a position of not being able to push rent increases anymore. In addition, the construction boom in the major cities has increased supply of apartments for high income earners dramatically.  

I don't know what's going on in LA, but here in New York, there is a glut of apartments on the market, rent growth has topped out, and landlords are offering concessions.  I see for sale and for rent signs as I walk around my "hot" neighborhood in Brooklyn.  I have not seen those since the Great Recession.   Yet, this list ranks New York as Number 5 on the list.  

Everyone on this site should ignore all lists of hot markets, top ten markets, etc.   They are not aimed at you.  They are marketing pieces aimed at journalists who will pick them up for stories because their cities made the list.  This one did its job.  If you google it, you can see it got picked up by a lot of journalists, most of whom have no clue how real estate investing actually works.  But "our city is number one in the world!!!" is a great headline and an easy story to write to get more clicks to your website.  

@Ramon Wilson   Investors looking to make money can never compete with investors looking for a way to preserve capital.   Right now, we are flooded with foreign money simply looking for safety, so they don't care about returns.  Getting zero return in LA or NY is better than losing it all to inflation or government appropriation.   At the current time, all the big cities are inundated with foreign capital and it's even started flowing into the secondary and tertiary cities as well.   The tide will eventually ebb, but who knows when?

@Account Closed Hey Ken! No, I wouldn't say that the second structure is preferable.  It really depends on what your objectives are.  If your investors are going to be passive and have no hand in operations, then a syndication could be better.  They probably want to be passive because it means there is no chance of them being considered a "real estate professional" and having their proceeds taxed at normal income tax rates.  In addition, a syndication may be better for you if you want operational control.  If you want to have sole control over how the deal is run, whether you finance, and when you sell, you should do a syndication with passive LP investors.   If you do a general partnership, then you may be in a situation where you need a majority of share to support your decisions or you won't be able to take them.  It really depends on what you and they want. 

In either case, you will need a partnership agreement, and when that much money is at stake, you absolutely need to have an attorney involved to draft it and advise you on options.  I can recommend people if you need.  

@Craig Herrman Usually a syndication deal is structured using an LLC. A syndication is a deal structure and an LLC is a legal entity.

A syndication is essentially a form of partnership in which limited partners invest money and have no rights to operate the property, which is run by the general partner.  The GP may or may not also be an LP, depending on whether he has funds in he deal.  The GP receives something extra, called a "promoted interest" over and above any funds he has invested, in exchange for him operating the deal.  In most cases, the GP does everything from find the deal to financing it to running it to deciding when to sell.  The LPs have no legal liability for anything beyond their membership interests.  That's why their liability is said to be limited.  

Contrast this with a regular partnership, which may or may not be structured as an LLC legally, in which all partners have the same level of liability. You can structure this pretty much any way you want. You can designate an operating partner and give him a little more equity. Or you can give someone who does not put money into the deal some equity because they found the deal, or signed on the debt, or are going to run it, or whatever.

Usually the kind of deal you are talking about, where some friends get together and buy a property, is the second scenario because they are working together on the deal and most people are not passive investors, though some might be.  

Syndications are usually used when there is one sponsor/GP who does everything and the investors are all purely passive and not looking to do anything more than write a check.  

Hope this helps.  

Jonathan Twombly 

@Ronald Hayden I'm not a CPA so take this with a grain of salt. It comes from my experience as an investor who structures the deals through LLCs. An LLC is a pass through for tax purposes, meaning that whatever net income comes into the LLC becomes taxable income to the LLC members in proportion to their shares of ownership. It's taxable to the members regardless of whether it's actually dispersed to them. In other words, if you want to retain profits in the LLC so that you don't have to keep putting new working capital into the LLC, you still owe taxes personally on the retained money. For this reason, people in this situation often make a "tax distribution," which is just the cash needed to pay the tax on the net income.

Every member of the LLC has a "capital account," which tracks the amount of money coming in from the member and going out to the member. If you put additional funds into the LLC, you can structure it either as equity going into your capital account or as a loan to the LLC.

But at this point we're taxing - pun intended - the limits of my knowledge on how this works.  I strongly recommend you consult with an real CPA to get an explainer.  Or maybe a CPA on this site can add to or correct what I've said above.  Hope this helps.  

@Account Closed  It's not just better financing options.  If you want to accumulate wealth and replace your job income, it's much faster to buy bigger properties.  It comes with its own problems, though, like being limited by your net worth and having to deal with much more interference in your business from banks.  I won't say there are fewer or more headaches with commercial properties, but there are different headaches.  The way I structure my deals, I don't have to deal with tenants.  But I do have to deal with lenders and investors.  It doesn't require a lot of time, but it does require a lot mental energy, especially when things are not going well and you have to explain to other people why not.  But, bigger deals are where the bigger money is, if you can figure out how to get into them.

@Account Closed  Anything 5 units or more is commercial.  Four units or less is residential.  But, practically speaking, quads are usually purchased by investors, even though some of them want to live in a unit.